SP500 Critical Support on Weekly Trendline and 200d SMA

Jul 29, 2011: 2:48 PM CST

I’m one for keeping market structure as simple as possible, and there are two major confluence support levels we need to be watching very closely that have been important market reversal points in the past, and we currently sit atop both of them.

What are they and what do they mean for the current state of the news-driven market?

Let’s start first with the intermediate term rising weekly trendline:

The intermediate term (2.5 years) trendline began at 666 with the March 2009 market low and connected the July and September 2010 market lows (1,010 and 1,040).

Extending the trendline into the present shows that the June 2011 low at 1,260 ended with a successful test of the trendline, and we again hit the rising trendline on Friday July 29th on the move to 1,280.

Keep this reference chart in mind as we play the “Will it Hold or Will it Break” game.

A firm close under the rising trendline would be expected to trigger additional selling as some nervous buyers liquidate their (hopefully) profitable long-term positions.

Beyond the intermediate term rising weekly trendline, we have the critical 200 day Simple Moving Average:

Some long-term investors use a stock chart for nothing more than to see if a stock (or index) is above its 200 day SMA.

Some investors also liquidate/close positions when a market firmly closes under this critical level while others see this as a fresh buying opportunity or chance to add to existing positions on a pullback to the key 200d SMA.

This is the whole purpose of key inflection points in a major market index:  Some see the move into confluence support as a dream buying opportunity while others see a firm breakdown under key support as a dream short-sell opportunity.

This is how major chart levels – very obvious ones like this – become “Self-Fulfilling Prophecies.”

Additionally, we can make sense of the current range in terms of Value Areas, as I posted earlier this week.

We can analyze the markets in all sorts of complex ways, but at times like this, it’s helpful to use simple/plain methods and think objectively in terms of IF/THEN statements.

In whatever analysis method you use to study the market – fundamental, technical, or quantitative – it would do well for you to understand the importance of the Bull/Bear inflection zone at the confluence of the rising weekly trendline and rising 200d SMA.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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5 Comments

5 Responses to “SP500 Critical Support on Weekly Trendline and 200d SMA”

  1. Minion Says:

    1000 point move when it breaks above 1350 or below 1250?

  2. Corey Rosenbloom, CMT Says:

    Haha I wouldn't expect a 1,000 point move, but downside targets include 1,200 then 1,100/1,050 while upside targets go to 1,400 to 1,440 minimum.

  3. nick Says:

    Like a movie this weekend w/the debt discussions…

  4. Sunday links: default distraction | Abnormal Returns Says:

    [...] The S&P 500 is sitting on its 200 day moving average.  (Afraid to Trade) [...]

  5. Charting the Breakdown in 10 Year Treasury Yield and Stocks | Afraid to Trade.com Blog Says:

    [...] have not yet broken their critical support at the 1,250/1,260 level, but they have already broken their 200d SMA key support.  A breakdown under 1,250 would likely be seen as a very negative sign for the stock [...]

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